Welcome to the second article in our three-part series that discusses NFTs and how they affect the environment and our futures. If you’ve never heard of what an NFT is, please check out the first part of our series where we dive into it here.
We’ll first look at where the NFT is stored and why that has an enormous environmental impact. Next, we’ll dive into possible alternatives and solutions to some of the especially negative environmental aspects of NFTs. Finally, we’ll look at how NFTs compare to traditional currencies, like money, and try to reach a verdict about the next steps.
The Location of the NFT + Why Is It Extremely Environmentally Costly:
The NFT is stored on an entity called the blockchain. A blockchain is a digital database that tracks every transaction involving an NFT (more on this in the first article if you’d like to delve deeper into it). For example, the Ethereum blockchain, the most popular blockchain, uses a POW (Proof-Of-Work) system that acts as a security system, allowing the “cryptic” to be kept in crypto-currency. However, the system requires a lot of energy to run because it works by making individuals solve complex puzzles using high-energy-producing machines in order to add a new “block” of verified transitions to the blockchain. Hence, every time a user adds an NFT or transaction to the blockchain, they are expending energy.
In terms of energy consumption, Ethereum is extremely inefficient. In fact, Bitcoin, another cryptocurrency, and Ethereum combined have a higher energy consumption than entire countries such as the United Arab Emirates. One Ethereum transaction has approximately the same energy expenditure as over 70 thousand VISA transactions and, as NFTs also require creating, bidding, selling, and transferring the token in their transaction, the energy adds up to over 10 times as much energy used as powering a refrigerator for a month. Furthermore, these numbers might be higher since it is extremely hard to measure the carbon footprint of the entire process . Moreover, as the attention surrounding NFTs grows, more transactions or creations of NFTs will be made, which will mean more hardware is needed and used, and more collective energy is expended. The total carbon footprint of NFTs will only continue to grow. The way the system is built currently is clearly not sustainable for our planet, even if it is for the economy.
One idea that is a step in the right direction is for online NFT exchanges to be marked with their total carbon emissions so that the public can make conscious decisions about their purchases. Some also suggest the usage of carbon offsets, which are payments made to fund a project contributing to the avoidance of carbon emissions, to cancel out the costs of NFTs. This is not extremely sustainable though, as it comes with the dangers of potentially justifying new carbon-intensive initiatives in the future, instead of prioritizing reducing emissions.
A bigger picture idea is to switch the current Proof-Of-Work (POW) systems to Proof-Of-Stake (POS) systems, which Ethereum is moving towards. This departs from the POW method of competing to solve complex puzzles to add new blocks to the blockchain since here, a single one is assigned to forge the block instead of multiple. This immensely decreases the energy expenditure and carbon emissions of the process. According to Tezos, a POS blockchain, the estimated annual energy consumption is 0.00006 Twh compared to 33.57Twh for Ethereum.
One should also consider the Crypto Climate Accord, which is composed of 250+ companies and individuals who are involved in the goal of making cryptocurrency sustainable and powering cryptocurrencies with 100% renewable energy. One of their main goals is to “Develop standards, tools, and technologies with CCA (Crypto Climate Accord) Supporters to accelerate the adoption of and verify progress toward 100% renewably-powered blockchains by the 2025 UNFCCC COP30 conference (United Nations Climate Change Conference of the Parties).” This goal is essentially looking at renewable energy powering blockchains, which has been backed up by a study from Cambridge University that discovered that almost 40% of all POW energy runs on renewable energy.
Crypto vs Traditional Currencies
Let’s take a step back to investigate the environmental impact of cryptocurrency versus regular forms of currency, like fiat money. Fiat money is the traditional currency you think of when you hear “money”, as it is legal tender whose value is tied to a government-issued currency, like the CAD dollar.
There has not been much research conducted that compares newer currencies like Ethereum with traditional banknotes, so Bitcoin will be used as an example. From this graph from Tufts, it is evident that they both have their advantages and disadvantages, so the comparison is not nearly as clear-cut as we might have thought.
However, we should consider the most crucial difference between crypto and regular currencies. Cryptocurrencies are only available in digital form, whereas paper money exists in physical form. Hence, while banks create money through lending (essentially out of thin air), cryptocurrencies are calculated through mining or staking (POW and POS) systems. There is also a fixed amount of cryptocurrency, and its decentralized nature is to be celebrated. This seems to be a better alternative to the inflationary and theoretically unlimited economic cycle that banks possess with paper money, which contributes to environmental issues today.
In conclusion, it is clear that currently, NFTs and cryptocurrencies have detrimental environmental effects. However, there are effective plans in place, from the Crypto Climate Accord to the switching from POW systems to POS, that might make this new currency sustainable in the long run. It may also prove to be a better initiative than traditional currencies. In the next article, we will interview some of the leading youth climate experts here at Starfish Canada and abroad on their opinions on this trending debate.